All posts by David Rosenberg

So with all the CB meetings out the way and a better understanding of what their thinking is regarding interest rate (hikes) and the state of their economies, what should we be looking for now and how has the market absorbed this news.

As a FX Options trader I always look to these numbers to see what the general consensus is regarding the short, medium and long term outlook for the currency. A FX Option basically is the right but not the obligation to buy or sell a particular currency at agreed upon rate (the strike) today in return for a premium (cost). I have always found Options to be a better way of adding or reducing hedging requirements as you know within reason (depending if you a buyer or seller of the option) what you maximum upside and downside is.

So looking at the major currencies, and for our purposes lets stick to EUR/USD, GBP/USD and EUR/GBP.

EUR/USD: this is the most actively traded currency in the world and as such the most actively traded FX Options contract. Looking at the 1m vol at 4.55/4.70 tells me from experience that the market is anticipation VERY LITTLE volatility and is thus happy to SELL these options and earn the premium. The last time we saw vol’s at these levels was over 10 YEARS ago!! I remember those summer months clearly. The rates created havoc amongst option traders who had no interest in hedging or buying volatility. They were happy to sell these options and earn the premium and hedge in the spot market as and when they needed. With the 2 CB meetings out the way, the market has fallen from over 7% (2 weeks ago) to these levels. With the lack of news and Summer around the corner, the market anticipates very little movement in the currency to warrant owning these options and paying away premium (daily) with very little opportunity to recoup the premium from daily trading.

GBP/USD vol have also been smashed though they were no where near 7% like the EUR above. They are down 1% with the 1m vol trading at 4.65/5.00 again showing the lack of interest in owning “vol”. The back end of the curve (6m-1y) is a lot higher and the curve steeper because this takes into account the much anticipated rates hike. 6m is trading at 6.50/6.85 and the 1y at 7.60/7.90 which tells me they are anticipating movement in the coming months.

EUR/GBP vol following the lead of the EUR and GBP vols above, despite trading below 0.8000. Once again the curve is quite steep with the 1m at 4.35/4.50, 6m at 5.55/5.85 and 1y at 6.05/6.30 and little in the way of decent flow going through. The best way to take advantage of these vols is to do “CALENDER SPREADS” where by you SELL the front and BUY the back end of the curve as a way of hedging yourself.

If you would like any more information or advice of FX options JUST ASK and I will be happy to help.

As for spot, the EUR/USD is trading around 1.3600, there is a EUR2bn option expiry today strike 1.3600 which tells me the market will in all likelihood remain around this level until 3pm expiry time. Unless the EUR can mount another challenge higher, I for one continue to call for a sell off (Buy USD) as we head in and out of the summer and the market starts to reposition itself. I still think we HAVE to break 1.35-1.3480 to confirm the next leg lower.

GBP/USD heading in my direction. I have been calling firmly for a break through 1.7000 (1.7040 now). GBP must remain above 1.7040 to confirm the next break higher. A failure will see a move back to 1.6980 -1.6960 again. Having said that I still like GBP stronger.

This all means EUR/GBP should remain below 0.8000 (1.2500) and my target is for 0.7050 (1.2580) in the coming days.

This all bodes WELL FOR GBP IMPORTERS who need to buy foreign currency (sell GBP). I am afraid the same does not hold true for Exporters selling foreign currency to BUY GBP. Unless you hedged yourself I am afraid to say the ship has left the harbour. All you can do now is either forward hedge OR my favorite do a Risk Reversal buy BUYING GBP Calls and SELLING GBP Puts – zero cost. That way you have your hedge in place and you know your best and worst case scenarios. Again happy to discuss and explain.

FED’s Yellen finally dropped the hint. They are NOT as hawkish as one would have thought. Stocks exploded with the S&P hitting an all time high 1957.74 and the Dow closing in on 17,000 (close 16906). What a difference a few years and a soft monetary policy makes. Both the BOE and the FED know that their hands are tied for now and the longer they delay raising interest rates the better their economies will be in the long run. We saw last year when the ECB jumped the gun and raised rates only to realise a month or so later that they messed up proper and reversed that hike. That was when rates were 1.25%, look at where we are now 0.15%. As long as the economy has time to get back on its feet and grow by way of low rates, the CB’s must be somewhat pleased with their ability to steer the economies through the turbulent waters and into sunshine and samba.

Bank Of England Monetary Policy Committee member Martin Weale noted there is no immediate need for the BOE to raise interest rates. He went on to say, this of course could change as we head into Q4. In his own words: “At the moment, I don’t see a case for an increase in
interest rates and I would be surprised if that changed in the near future. Later in the year would be a different matter, I will have to wait to see how the economy evolves and pressures in the labour market.” The BOE is basically trying to man manage the “forward market” so that there are no knee jerk reactions if and when they (potentially) raise rates in 2014.

Retail sales at 9.30am (this morning) the consensus is for a -0.60% drop from +1.8% rise last month.

I OWE YOU AN APOLOGY. Yesterday I noted USD/ZAR had broken through 10.8050 level and was firmly in a bear channel to 11.0600 area. The only problem i never foresaw was CPI would come in at +0.2% which super excited the market moving the ZAR from 10.8350 to 10.7850 and which was further buoyed by Yellen’s comments last night which pushed the EUR firmly above 1.3600 (currently 1.3630). There is a huge correlation between EUR/USD and USD/ZAR. Because the Eurozone is SA’s largest trading partner any moves in the EUR will have significant impacts on the ZAR. The rally in the EUR o/n has added to the ZAR’s strength which is currently trading around 10.6400.

EUR/GBP taking an almighty knock. After yesterday’s 9-0 vote, the market decided it was time to take profit and has since moved the currency from 0.7970 to 0.8015 currently. GBP/USD is trading above 1.7000 (1.7010) and a move to 1.7040 is now on the cards as it plays catch up to the EUR.

All in alll with the 2 major news events out the way FX Option Volatility has been hammered. 1m EUR/USD down to 4.7250 mid (-0.50% o/n – new lows since 2007), 1m USD/JPY down to 4.95 (-0.65% o/n), 1m GBP/USD down to 4.50 (-0.50% o/n) and 1m EUR/GBP 4.625 mid (-0.375% o/n) … These are levels we have not seen for nearly 10 YEARS!!! What this tells me is the CB’s have done an outstanding job in “managing” the currencies to such an extent that it has all but taken the wind out the sails. And summer is on the way!!! that all spells MORE losses potentially.

Bank of England minutes out at 9.30 UK time today. The bullish tone to GBP just prior to Carney’s speech and since should remain. I think any movement in interest rate stance , voting patterns (did anyone vote for a rate hike now) and rate movement (any more signs of when they are likely to pull the trigger) will be well addressed. With this in mind it is always best to tread cautiously on the minutes announcement given the risk reward angle (one of the MPC members already voting for a rate hike). Any 9-0 vote will not cause too many ripples but not enough to keep GBP on the front foot. I would cautiously buy GBP at these levels and then look for a break of 1.7040-45 which is a 5 year high, which to me signals the break is solid. Cable Support 1.6915-25 Resistance 1.7010 1.7040-45

EUR/GBP will follow the lead of the GBP/USD. While the EUR zone remains in the doldrums for now, it is essential that the focus remains on the GBP. The mere fact that we have opened this morning in positive territory and in such close proximity to psychologically important “break” levels leads me to believe that the market is preparing itself for a knee jerk move before settling down and digesting the news. It will be interesting if nothing else. One thing is for sure if the vote was 9-0, GBP will fall back before finding its feet again (wobble shock). Support still at 0.7950 , 0.7920 Resistance 0.8020-25.

EUR/USD teetering around 1.3550. For the past week most pundits (including myself) have been calling and looking for the EUR to break 1.3500. I think Yellens FOMC comments tonight could very well bring that to the fore as we are likely to get a better idea of when they are likely to change their Monetary policy. If you asked me at the begining of the year my thoughts on the USD I would have said BUY IT. Granted for the first 6 months I would have been sweating some!! I think the next 6 months are likely to bring out the USD bulls en masse with talk of rate hikes on the distant horizon. 1.3480 for me is the crucial level to get through and stay under before we see another leg lower. However this morning’s MPC minutes could have it’s parade rained on. The best way to take advantage of this is BUY OPTION GAMMA (short dated options).

USD/ZAR has broken through 2wk triangle resistance at 10.8075. This should provide the fuel to make a move to 11.0600. USD/ZAR has potentially resumed its long term bear trend in our opinion after disastrous economic numbers showing the Country is lagging massively behind its BRIC members. The mining strike has had a marked effect on the ground. My view is that USD/ZAR could very well be on its way to new 2014 highs of11.3915 reached on January 30th this year. As I write this CPI has just been published at +0.2% (consensus 1.00%) which moved the ZAR from 10.8350 to 10.7950 (Currently 10.8050)

GBP CPI just been published at 1.50% down from 1.80% (consensus 1.70%). Very good number all things considered (Housing growth).

In my opinion this is a very muted reaction in the currency markets I would think GBP would continue its bullish tone again look for 1.6915-25 to hold in GBP and 0.8020-25 to cap EUR/GBP. Downside support for EUR/GBP 0.7950, 0.7920 Cable resistance 1.7010 1.7040. All in all these inflation numbers have spooked the market with a 0.20% reversal in recent gains. While I still feel comfortable that GBP will rally these pullbacks are always “healthy” for the market as it forces the day trader to cut their positions thus lowering the weighted positioning in GBP.

Tonight the Fed starts their monthly FOMC meeting. A $10 bn reduction in the Fed’s asset programme is expected this Wednesday (FOMC meetings last 2 days), which would bring the total amount it buys to $35bn per month. But it is Yellen’s press conference and the latest growth, inflation, and rate forecasts that really matter for markets.

While growth is expected to be revised lower because of the disappointing start to the year, inflation could be revised higher, which may give Yellen more room to indicate she might be willing to tighten earlier than currently expected. The forward curves are expecting the first rate hike from the Fed in May – August 2015, potentially five months after the BOE. Tomorrow’s announcement will give us an insight as to whether Yellen intends to lower this gap.

The market therefore, appears to be expecting a hawkish Fed. The past week has seen buyers of USD’s. Having said that the past 24 hours USD holders have parred their positioning and so if Yellen fails to deliver, and sticks to her uber-dovish mantra, we could see downward pressure in the USD, which could boost both the GBP and EUR.

As I have been writing over the past few sessions, GBP has rightfully taken over as the gotta-be-in-it currency to hold. GBP broke the psychological 1.7000 level o/n (Asia session), settling back to 1.6980 as I write this. I would imagine that there were a fair number of knockouts and one touches (exotic options) with triggers at 1.7000 which when touched would have triggered sell orders in GBP. Safe to say the market will now digest the latest move and decide on the next bets which they feel are likely to offer the best returns. I have been VERY GBP positive calling for the moves when we were trading around 1.6800 and 0.8135. We have now breached both my targets (1.7000 & 0.8000). With the cat out the bag after last weeks speech by Carney and a rise in UK yields, all eyes are now on the release of the BOE minutes on 18th June. There is likely to be more news and titbits about the “exact” month the market expects Carney & co to make their move. The general consensus is around December/January, though I would hazard a guess and say the best bet is for Q1 2015 if anything. There is still a decent amount of time and data releases between now and then so while nothing is cast in stone it appears we are pretty set for the rate hike in Q1.

US stocks finished in positive territory on Friday, something which has not carried over to the European session. FOMC this week we expect ANOTHER tapering of QE by another $10bn. At the same time we are expecting a downward revision of GDP, Unemployment and rising inflation. In my opinion the US will start to look to hike rates Q3 onwards, moving quickly to balance the economy. As I have mentioned in previous commentary, PATIENCE is the key!! Carney, Yellen et al must tread carefully and make sure they pull the trigger on raising rates at the right time. The last thing they need is to jump the gun and then have to back peddle when it becomes obvious it was the wrong time. in a nut shell, they must manage the markets expectations regarding the timing of the first rate hike in order to avoid and disorderly and potentially disastrous price moves.

So for now I am looking for EUR/USD to tap under 1.3500 (1.3525 now), GBP/USD to climb and break 1.7000 again moving to 1.7050-75 (1.6975 now), EUR/GBP to dip below 0.7950 testing the 0.7920/30 area (0.7967 now).

Well well well. It is comforting to know that my comments over the past few days have been spot on. It has been a monumental move in GBP reinforced last night after comments by Governor Carney that US interest rates are likely to move higher sooner rather than later. They have no other option really. The economy is starting to show signs of overheating and one way to try slow it is to raise rates. They will as they said be gentle and let the economy absorb the hikes before deciding on the next move. One thing is for certain, if Carney mistimes the hike he could potentially drag the UK back into negative territory so he will have to be absolutely certain the timing is right.

The housing market is leading their need to move sooner rather than later. I guess as i have said hot money has flowed out the USD and EUR and into GBP and this is adding fuel to the fire. They really have no other option. The conservative Govt. and their austerity package has worked. That is a FACT!”! They have reversed the negative trend and put the UK back on the map. Now all we need is for England to win the World Cup and the job will be all but done (well it is wishful thinking).

So what now, we are through 0.8000 and from what i can gather there is an acute desire to try take it lower again as the market digests Carney’s comments. I believe we will see another move lower and the street is now looking for a target of 0.7900-0.7920. Any bounce we believe I believe will be capped at 0.8050. However keep in mond for this to happen GBP/USD MUST BREAK 1.7000. I have been saying the EUR/USD should test 1.3500 and if this is indeed the case this will be a catalyst for the move lower in EUR/GBP.

Here is a comment from a GBP FX trader I completely trust:

“- Carney’s speech last night has basically re-affirmed what we already knew , good data backed up by a very strong housing market is causing concern. The interest rate has become too comfortable after initially kick starting the economy with people’s new found wealth from lower mortgage payments. This has become the expectation now and needs to be addressed. Carney seems to be well in tune and seems to realise the problems but due to the expectation of these low rates any move has to be well sign posted to allow people to re allocate household budgets, thus i believe any move will come a month after a Quarterly Inflation Report (next QIR is August then Nov). Cable after a quiet 2 weeks is now presented with 1.7000 again (1.6998 previous high) 1.7040 resistance above that,, EURGBP should still be the more volatile ccy pair support 0.7950-0.7920 resistance 0.8040”

The show must go on!!! I have been talking relentlessly about the strength of the GBP vs EUR & USD & CHF (mainly) and this trend is continuing unabated. We have touched on why I feel this trend is strong and why I feel it could carry on for the time being. Anticipated interest hikes (May 2015) and strong numbers all point to the UK being the “place to be” or should I say the currency to hold. I have been telling everyone who will listen to me (and there are a few), how they should WAIT if they are BUYERS of EUR and on the flip side importers needing foreign currency (SELLING gbp). Let me put it this way, if you need to hedge NOW if a great time to do it. While I nor anyone else i know can predict what will happen next, there are certainly signs that give us a good idea. So on Monday I tweeted with EUR/GBP at 0.8090 to stay short eur’s and follow the trend. Opened this morning at 0.8040 (0.5%) move in your favour while GBP/USD has appreciated around 0.25%. I STILL FEEL strongly that the Pound will make another attempt on 1.7000 (vs USD) and that will potentially see EUR/GBP sub 0.8000 (1.2500). So for now my advice, as an importer (sell £ vs buy $ etc) you are looking good. As an exporter (buying £) I would bite the bullet and hedge now. I guess there is no time like the present. Lastly as a buyer of EUR (sell £) again I like the trend lower and as I write this spot has already fallen 10 pips….

For the third time in a row, the Central Bank of NZ (RBNZ) raised the cash rate 25bp to 3.25%. After hiking rates by 25bp to 3% in April, the RBNZ has raised the cash rate by a further 25bp to 3.25%. This is the highest cash rate since early 2009, although financial conditions are a little tighter than this would indicate, given that the RBNZ had estimated that the loan controls introduced late last year to take the heat out of the housing market had the same effect as a 30bp rate rise. I would assume Mr Carney at the BOE is looking and thinking, is this what I will have to do to stem the rise in the Housing Market!!!The RBNZ trimmed its forecast profile for short rates a little, but is still forecasting several more rate hikes, as early as July!!!

The rally in stocks slowed down overnight with S&P down 0.35% and Dow down 0.60%. Do I fear this is the start of something else, absolutely not. Ask any seasoned trader and they will tell you, sometimes it’s good to cash in profits let the market settle back and jump back in. It is for this reason I think the day traders in all likelihood cashed in and are now looking at when next to get back in.

O/n the World Bank cut its global growth forecasts and some corporates downgraded their profits outlook. This added to the pressure we say in late NY trading. But keep in mind what I have been saying recently, the Central banks MUST WALK ON EGG SHELLS!! if they jump the gun and start raising rates (when they should have waited) it will all end up going back to 2010 and recessions. Keep a cool head and let corporates grow their finances and profits and then look to hike.

Keep an eye in Iraq and the security situation there. oil will be affected if matters take a turn for the worse, and that will be a real pain in the ear for corporates and the like as it cuts into their earnings. Also a rise in oil for net importers will add some negativity to GDP and raise inflation.

The Pound continued its relentless drive vs the EUR as the markets begins to discount a hike in interest rates around May 2015. While this has been one of the reasons for the recent strength, another catalyst has been the recovery of the UK economy vs Europe and other 1st world economies. Growth rates are returning to levels seen pre-2008 with the IMF acknowledging that even they might have underestimated the recovery. With this backdrop and a potential hike in rates, money managers and the like have been moving cash out of the EUR (whose Depo rates went into -ve territory at last weeks ECB meeting) and instead ploughing cash into GBP. This is creating a knock-on effect for the FTSE where hot money is flowing. The housing market, and I should stress it is really within the M25 (highway) borders, has not helped matters and it is my opinion that even a hike in rates will do little to dampen the housing rally. Put it this way, if you are a money manager looking for returns where would you look!!! There is so little in the way of opportunity right now (and CB’s attempt a gentle landing of their economies) that your options are really limited to property, stocks and corporate bonds. I for one see this rally continuing for the time being as investors look for opportunities.

US equity markets ended flat last night with Europe opening flat to down overall. Non-farm payrolls continue to impress and this too is adding to the recovery we are seeing in the States. I for one do not see Ms Yellen raising rates before the end of 2015 giving the economy time to settle into a rhythm and finding support. I was always a firm believer that the worlds economies were so reliant on the US economy. Remember the old saying, if the US sneezes the world catches a cold. This is why it is so important that they get it right first time.

Lastly on the EM side, as the EUR begins its move down BE CAREFUL of a fall out (which I anticipate) and depreciation in ZAR, TRY, BRL, MXN, IDR, to name but a few. Huge correlation trades and any deterioration in the EUR will have a marked impact on the EM currencies above